As the COVID-19 pandemic is exerting high pressure on the global economy, the International Monetary Fund (IMF) has proposed a $50 billion trust fund that could help low-income and vulnerable middle-income countries to build resilience against balance-of-payments shocks and ensure a sustainable recovery.
The trust fund is part of IMF’s options for channeling some of the $650 billion Special Drawing Rights (SDRs) issued in August last year from countries with strong external financial positions to vulnerable countries through a resilience and sustainability trust (RST), the agency said in a blog post.
The Washington-based lender explained that about three-quarters of its membership could qualify for the RST financing, including all low-income countries, all developing and vulnerable small states, and all middle-income countries with per capita gross national income (GNI) of about $12,000.
“The RST’s central objective is to provide affordable long-term financing to support countries as they tackle structural challenges. RST support aims to address macro-critical longer-term structural challenges that entail significant macroeconomic risks to member countries’ resilience and sustainability, including climate change, pandemic preparedness and digitalization.”
The IMF approved a record general allocation of $650 billion in reserve assets, better known as SDRs, to help member countries, especially emerging and developing nations, cope with the economic fall-out from the coronavirus pandemic.
The SDR is the fund’s unit of exchange and is made up of a basket of the world’s five leading currencies including the US dollar, the euro, the yuan, the yen and the UK pound. While the SDR is not money in a classic sense because it cannot be used to buy things, it is an accounting unit for IMF transactions with central banks and a stable asset in the international reserves of member countries. The $650 billion allocations are equivalent to about 456 billion SDRs.
According to IMF, out of the $650 billion allocations, about $275 billion will go to emerging markets and developing countries, including low-income nations.
“It is crucial not to overlook the longer-term challenge of transforming economies to become more resilient to shocks and achieve sustainable and inclusive growth. The pandemic has taught us that not addressing these long-term challenges in a timely manner can have significant economic consequences, with the potential for future balance-of-payments problems,” said Ms. Uma Ramakrishnan, co-author of the blog and Deputy Director of the IMF’s SPR department.
To qualify for RST support, an eligible member would need a package of high-quality policy measures consistent with the fund’s purpose. They would also need a concurrent financing or non-financing IMF-supported program with appropriate macroeconomic policies to mitigate risks for borrowers and creditors, and sustainable debt and adequate capacity to repay the fund.
The RST would allow for more flexible terms, notably on maturities, than the terms that apply to the IMF’s general resources, according to the lender. Its loans would have much longer maturities than traditional IMF financing. IMF staff proposed a 20-year maturity and a 10-year grace period for RST loans. A tiered interest structure would differentiate financing terms across country groups, with a high degree of concessionality for lower-income members.